A chart of accounts is the list of categories every transaction in your business gets sorted into — assets, liabilities, equity, income and expenses. Get it right and your monthly reports answer questions. Get it wrong and you end up with a "sundries" account containing R80,000 and no idea what happened.
Two design rules do most of the work: build it around the questions you actually ask about your business, and align it with what SARS wants on the ITR14.
The five categories
Every account belongs to one of five types, and that type determines which statement it appears on.
| Type | What it is | Statement |
|---|---|---|
| Assets | What the business owns | Balance sheet |
| Liabilities | What the business owes | Balance sheet |
| Equity | What is left for the owners | Balance sheet |
| Income | What you earn | Income statement |
| Expenses | What you spend to earn it | Income statement |
Most accounting software uses a numbering convention, commonly 1000s for assets, 2000s for liabilities, 3000s for equity, 4000s for income and 5000s upward for expenses. The numbers matter less than the consistency.
A workable structure for a South African SME
Start here and adapt. Fewer accounts, used consistently, beats more accounts used carelessly.
Assets
Bank — current account
Bank — tax savings account
Petty cash
Card machine / payment gateway clearing
Trade debtors
Stock
Prepayments
Equipment — cost
Equipment — accumulated depreciation
Vehicles — cost
Vehicles — accumulated depreciation
Director's loan account (debit)
Liabilities
Trade creditors
VAT control
PAYE, UIF and SDL payable
Income tax payable
Credit card
Loans — short term
Loans — long term
Director's loan account (credit)
Equity
Share capital
Retained earnings
Current year profit
Income
Sales — [split by your main revenue streams]
Other income
Interest received
Cost of sales
Purchases / materials
Direct labour
Subcontractors
Freight in
Operating expenses
Accounting and audit fees
Advertising and marketing
Bank charges
Cleaning
Computer and software
Entertainment (VAT denied)
Insurance
Legal fees
Motor vehicle expenses
Printing and stationery
Rates and municipal
Rent
Repairs and maintenance
Salaries and wages
Staff subsistence — overnight travel (VAT claimable)
Staff training
Telephone and internet
Travel — local
Depreciation
Interest paid
Design rule 1: build it around your questions
Split income the way you think about your business. A restaurant that thinks in food, beverage and functions should have three income accounts, not one. An agency that wants to know retainer versus project revenue should split them. If you cannot answer "which part of the business is growing" from your income statement, your income accounts are too coarse.
Separate cost of sales from operating expenses properly. This is what produces a meaningful gross margin, and gross margin is the most diagnostic number you have. The test: would this cost disappear if you sold nothing? If yes, it is cost of sales. See how to read an income statement.
Do not create an account you will never look at. Fifteen expense accounts you review beats sixty you ignore.
Design rule 2: build in the tax treatment
This is the rule that saves money, and almost nobody applies it.
Ring-fence the VAT-denied categories. Create separate accounts for the things you may never claim input VAT on, and set them as no-VAT in the software so the system cannot claim by accident:
Entertainment (VAT denied)
Motor cars (VAT denied) — separate from commercial vehicles
Club and sporting subscriptions (VAT denied) — separate from professional bodies
And separate the claimable lookalike. Staff subsistence on overnight business travel is claimable, and it is the most commonly missed claim in South African small business precisely because it gets coded to "Entertainment". Give it its own account. See the expenses you can never claim VAT on.
Separate the non-deductible. Fines and penalties are never deductible for income tax. Give them their own account so the tax computation add-back is mechanical rather than a hunt.
Match the ITR14 categories. Where your accounts broadly align with the expense categories on the company tax return, preparing the return becomes a mapping exercise rather than a reconstruction.
The mistakes that make a chart of accounts useless
1. A "Sundries" or "General expenses" account. If it has a meaningful balance, it means nobody classified those transactions. It is also the first thing an auditor or SARS reviewer looks at.
2. Too many accounts. Forty expense accounts where twenty would do produces inconsistent coding, because two people faced with "Stationery" and "Office supplies" will choose differently every time.
3. No director's loan account. Every owner-managed business needs one, and most only discover it exists when the tax problem arrives. See what is a director's loan account.
4. VAT and PAYE not held as liabilities. These are amounts you owe SARS, not income. Holding them properly is also what makes it obvious how much of your bank balance is not yours.
5. Changing it mid-year. Comparatives break, and trends become unreadable. Change it at year-end and map the prior year across.
6. Using the software default without adapting it. Every package ships with a generic chart. It is a starting point, not an answer.
When to review it
At year-end, alongside the financial statements. Look for accounts with nil balances that can go, accounts with large balances that should be split, and anything sitting in sundries.
When the business changes — a new revenue stream, a new location, a new entity.
When you cannot answer a question from your reports. That is the signal the structure no longer fits.
Frequently asked questions
What is a chart of accounts? The list of categories every transaction in your business is sorted into, grouped as assets, liabilities, equity, income and expenses. It determines what your income statement and balance sheet can tell you.
How do I set up a chart of accounts for a small business? Start with a standard structure covering the five account types, then adapt the income accounts to match how you think about your revenue, split cost of sales from operating expenses properly, and ring-fence the VAT-denied and non-deductible categories so the tax treatment is built in.
How many accounts should a small business have? Fewer than most people create. Fifteen to twenty-five expense accounts, used consistently, is more useful than sixty used inconsistently. The test is whether you actually review the account.
Should I use the default chart of accounts in my software? As a starting point only. Every package ships with a generic chart that will not reflect your revenue streams, your cost of sales, or the VAT-denied categories you need ring-fenced.
Why should entertainment have its own account? Because input VAT on entertainment is specifically denied. Giving it a dedicated account, flagged as no-VAT in the software, prevents the system claiming it automatically — which is one of the most common findings in a SARS VAT verification.
Can I change my chart of accounts mid-year? Better not to. Changing mid-year breaks comparatives and makes trends unreadable. Change it at year-end and map the prior year across so the comparison still works.
Set it up once, properly
A chart of accounts takes an hour to design and shapes every report you will read for the next five years. Most businesses accept the software default and then wonder why their monthly numbers do not tell them anything.
Smartbook sets the chart of accounts up around your actual revenue streams and cost structure, with the VAT-denied and non-deductible categories ring-fenced from the start.
Last reviewed: 26 July 2026. Written by the Smartbook team — SAIPA and SAICA accredited, SARS registered tax practitioners. General guidance, not advice on your circumstances.